Testing for causality between the foreign direct investment, current account deficit, GDP and total credit: Evidence from G7

• Main Authors: Akbas Yusuf Ekrem, Senturk Mehmet, Sancar Canan
• Format: Article
• Language: English
• Published: Economists' Association of Vojvodina 2013-01-01
• Series: Panoeconomicus
• Subjects: current account deficit; foreign direct investment; GDP; credit; panel co-integration and causality; G7
• Online Access: http://www.doiserbia.nb.rs/img/doi/1452-595X/2013/1452-595X1306791A.pdf
• ISSN: 1452-595X; 2217-2386

In this study, countries were analyzed between 1990 and 2011 in order to determine whether a causal relationship exists among current account deficit, GDP, foreign direct investment, and total credits of G7. Analysis took into account the cross-sectional dependence and was applied to test the causality among the variables form the panel. Firstly, panel unit root tests were used for determining stationary of variables. As a result of the panel unit root tests, it was found that GDP and foreign direct investment have a stationary structure and that total credits and current account deficit contain unit root. In order to see whether there is a long-term relationship among the variables or not, the panel co-integration test was used. As a result of the test, it was concluded that there is a co-integration relationship among the series. The possibility of a causal relationship was analyzed among the variables using the causality test developed by Elena Ivona Dumitrescu and Christophe Hurlin (2012). Results of the analysis showed a unidirectional causal relationship from current account deficit and foreign direct investment to GDP. Bidirectional causality was found between current account deficit and total credits. Finally, a unidirectional relationship was found from foreign direct investment to current account deficit and total credits.